Everything You Need to Know About Quantitative Risk Analysis

Effective risk identification and management are important to the success of projects. Regardless of the size or scale of your project, if you have not taken the time to define, categorize, prioritize and evaluate the effect of external threats before work starts, achieving it on time and within budget is almost impossible.

Risk analysis is dominated by two well-developed methodologies: qualitative and quantitative. And a surprising number of people within the project management bubble still fail to differentiate between them, considering their universality.

To conduct multiple forms of risk analysis, project managers should be trained. For several projects, what you need is a faster qualitative risk evaluation. But there are periods when you will enjoy a quantitative risk assessment.

Let's take a look at the following kind of analysis: What is it? Why is there a need to perform it? When should it be carried out? And how are threats quantified?

Quantitative Risk Analysis: Definition

Quantitative risk analysis is a numerical calculation of the overall risk effects on the goals of the project, such as cost and schedule goals. The findings provide insight into the probability of project completion and are used to build reserves of contingency.

Moreover, it is a further analysis of the absolute best priority risk during which a numerical or quantitative rating is given to work out a probabilistic analysis of the project.

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A Quantitative Review:

• Quantifies future project performance and measures the likelihood of achieving particular project objectives
• Provides a quantitative approach to decision-making when uncertainty occurs
• Creates expense, schedule or scope goals that are practical and achievable

You would need high-quality data, a well-developed project model, and a prioritized list of project risks to perform a quantitative risk analysis (usually from performing a qualitative risk analysis).

Why Quantitative Risk Analysis Is Conducted

• Better Measurement of Overall Project Risk

In a qualitative risk analysis, individual risks are measured. However, the quantitative analysis helps one to determine the overall risk of the project from individual risks plus other risk sources.

• Better Decisions for Company

For all the data or knowledge we need, business decisions are rarely made. Quantitative risk analysis offers more quantitative knowledge and evidence than qualitative analysis for more critical decisions. Note: While quantitative analysis is more objective, it is still an approximation. In the decision-making process, wise project managers consider other variables.

• Better Predictions

A project manager measured the length of a project at eight months with a cost of $300,000. Currently, the project took twelve months and cost $380,000. What has occurred?

The project manager performed the Job Breakdown Structure (WBS) to estimate the work. The project manager, however, failed to consider the possible effect of the risks on the timeline and budget (good and bad).

The Distinction Between Qualitative and Quantitative Risk Analysis

Two approaches to analyze risk are quantitative and qualitative risk analysis. The most noticeable distinction between the study of qualitative and quantitative risk is their approach to the process. Hard metrics, such as dollar sums, are used for quantitative risk analysis, while qualitative risk analysis uses simple approximate values. Quantitative is more objective, and qualitative is more subjective.

By using quantitative analysis for risks that can be easily expressed in hard numbers, such as money, and qualitative analysis for the rest, hybrid risk analysis blends the two. Quantitative risk analysis is more difficult: You will need to quantify the asset value of the data center to quantitatively evaluate the risk of damage to a data center due to an earthquake. This could be the cost of the facility, computers, network equipment, computer racks, monitors, etc. Then the exposure factor is measured, etc.

The study of qualitative risk appears to be more subjective. It focuses on defining risks to calculate both the probability of one risk event happening over the life cycle of the project and therefore the effect it might have if it reaches the overall timeline. The aim was to assess the magnitude. To communicate outstanding dangers to stakeholders, results are then reported in a risk assessment matrix (or any other form of an intuitive graphical report).

On the opposite hand, quantitative risk analysis is objective. In terms of cost overruns, scope creeps, resource usage and schedule delays, it uses verifiable data to gauge the consequences of risk. The aim is actually equivalent. The difference is that a more analytical, data-intensive approach is required. An example of quantitative risk analysis is estimating the Annualized Loss Expectancy (ALE). For ALE, the inputs are hard numbers: asset value (in dollars), exposure factor (as a percentage) and annual occurrence rate (as a hard number).

Quantitative risk analysis assigns a numerical value to current threats in layman's terms. Risk A has a 40% probability of occurring based on quantifiable data (resource cost variations, average completion period of operation, logistics, etc.) and a 15% chance of causing a delay of X days. It's therefore entirely hooked into the quantity and accuracy of your information.

Should I Perform Quantitative Risk Analysis or Not?

We identify risks first. Then, qualitatively and quantitatively, we can determine the risks.

Think about using Quantitative Risk Analysis for:

• Projects that involve the plan and budget to include a Contingency Fund.
• Big complicated projects that involve Go/No Go choices (in a project, the Go/No Go decision can occur several times).
• Projects in which upper management needs more information about the possibility of completing the project on time and within the budget.

Quantitative Risk Analysis: Benefits

One of the key advantages of quantitative risk analysis is that it allows a broader description of risks. Although, qualitative risk analysis is subjective, and quantitative risk analysis is objective. Relevant, numeric values are provided instead of high-level classifications that establish a common understanding among stakeholders and others involved in the project.

Specific values arising from quantitative risk analysis allow for the preparation of risk responses or steps taken to address risks. This is important because while qualitative risk analysis helps to define the risks to handle, these decisions are guided by quantitative risk analysis. One potential risk solution, for example, is a transition, where risk is transferred to someone else, such as buying insurance.